This is the central question that I've been asked over and over again when I explain the concept behind Gluejar's forthcoming ungluing ebooks service. How much is it going to cost to unglue a book?
But I'm the type that has to understand where these simple-sounding rules come from. In an environment where everything is changing, it's worth understanding whether "rules of thumb" still have hands to attach to.
Here's another thing to imagine. Suppose someone offered to pay you $1000 per year, forever. What would you pay that person in exchange for that (reliable) promise?
If you are not a mathematician or a banker, you might suppose that no amount of money could secure such a great deal. A revenue stream that lasts forever should have infinite value, shouldn't it? It is my duty to tell you that if you thought that, you would be wrong, and the bankers and their mathematicians would be right. In fact, you can easily purchase such a revenue stream. It is called a US Treasury Bond.
For the current discussion, I will ignore the odd fact that the securities markets have for the past few days responded to Standard & Poors' downgrade of US Treasury obligations by making the same obligations more valuable. That says a lot about both Standard & Poors and US Treasury Bonds, but it says nothing about selling books.
|New World Disorder, by Stephen Barnwell|
Owning rights to a book that pays you $1000 this year is not nearly as good a deal as owning a treasury bond that pays the same. That's because most books sell fewer copies year after year. Let's suppose that a book's sales decline 30% per year. Then the total revenue from that book will be
R = $1000(1+ 0.7 + 0.72 + 0.73 + 0.74 + 0.75+ ...)
continued to infinity. Here's where math comes in. That infinite sum is equal to a simple ratio:
R = $1000/(1 - 0.7) = $3333
But you'd do better putting the $3333 into T-bills, because very few books have the same sales year after year. If the T-bill interest rate is r and the sales decline is d, then the value of the book's revenue stream is
R= $1000/(1 - r - d )
Finally, it's important to note that revenue is not the same as profit. If a book wholesales for $15, a publisher probably keeps only half that as margin. So if the publisher's margin is m, and this years net sales is N, the revenue stream is worth N * m *(1/(1-r-d)). So, for
m = 50% r = 70% d = 3.54%the revenue stream is worth 1.89 times net sales. Those thumb guys weren't so far off!
Many authors will look at these calculations with some skepticism. What if a book is discovered by Oprah and becomes an overnight success? There are some things to keep in mind. First, Oprah isn't doing her show any more. If you think of owning a book as a lottery ticket, there are two more things to think about:
- You can take cash and buy real lottery tickets
- there might be ways to improve the lottery odds of a book. Giving your book to a million people for free, might greatly increase the value of your next book if they love the first. Just hang on to the movie rights!